All these are great points! You’ve updated me that the IUL solves a real problem.
The thing I felt (and still feel) that you aren’t acknowledging is the investment returns on savings—with the IUL, the insurance company will invest the money and take all the upside; whereas if you save it yourself, you can keep that upside. In the linked post you assume a 0% return on savings.
I did run through a few scenarios with nonzero rates of return. The IUL doesn’t come out ahead in expectation, but it seems to have been designed well enough that if you want certainty, it wins:
Scenario A: $320/month saved for 15 years at 7% grows to $100k in those 15 years. Then you’re done. (Obviously that 7% rate of return comes with substantial risk, so you have a chance of not being at 100k at that instant; but you still have 5 years to solve the problem before your term runs out!) This has a high chance of solving the problem in 20 years instead of 60, and you still have the rest of your life for that investment to keep growing. That said, it’s still a risky strategy and I haven’t accounted for the cost of the term life premium.
Scenario B: $88/mo for life (your IUL quote). You will reach $100k at the 60-year mark as long as you average a 1.5% rate of return; at 2% you only need 54 years; at 3% it’s 46 years. Again, a risky strategy.
IUL gives you a certainty of death benefit with a relatively low monthly premium. The cost is basically all your upside, which is substantial, but like you said, I think it’s probably worth it for people who have the problems it solves.
Ah yes, failing to acknowledge that wasn’t a rhetorical choice, just a failure of my economic literacy. I don’t have much to say other than that this seems correct on all counts :)
All these are great points! You’ve updated me that the IUL solves a real problem.
The thing I felt (and still feel) that you aren’t acknowledging is the investment returns on savings—with the IUL, the insurance company will invest the money and take all the upside; whereas if you save it yourself, you can keep that upside. In the linked post you assume a 0% return on savings.
I did run through a few scenarios with nonzero rates of return. The IUL doesn’t come out ahead in expectation, but it seems to have been designed well enough that if you want certainty, it wins:
Scenario A: $320/month saved for 15 years at 7% grows to $100k in those 15 years. Then you’re done. (Obviously that 7% rate of return comes with substantial risk, so you have a chance of not being at 100k at that instant; but you still have 5 years to solve the problem before your term runs out!) This has a high chance of solving the problem in 20 years instead of 60, and you still have the rest of your life for that investment to keep growing. That said, it’s still a risky strategy and I haven’t accounted for the cost of the term life premium.
Scenario B: $88/mo for life (your IUL quote). You will reach $100k at the 60-year mark as long as you average a 1.5% rate of return; at 2% you only need 54 years; at 3% it’s 46 years. Again, a risky strategy.
IUL gives you a certainty of death benefit with a relatively low monthly premium. The cost is basically all your upside, which is substantial, but like you said, I think it’s probably worth it for people who have the problems it solves.
Ah yes, failing to acknowledge that wasn’t a rhetorical choice, just a failure of my economic literacy. I don’t have much to say other than that this seems correct on all counts :)